Total consumer spending increased by just $8.8 billion in January far short of the $17 billion consensus expectation. This was the smallest month on month gain since December 2015. Revolving credit declined by $3.8, while non-revolving credit expanded by $12.6 billion. While this is concerning, a one month data-point does not a trend make. The economy continues to gain strength, job creation is sold and household balance sheets are in the best shape in decades.
Heading into 2017, economists expect continued strong job creation at levels on-par with 2016. This bodes well for increased borrowing as consumer confidence continues to improve. Debt payments as a percentage of disposable income are at record lows leaving room for consumers to take on additional debt. Figure 1 shows consumer credit outstanding from 2000 to present. The blue line is revolving credit (credit cards) which is expensive money compared to installment loans, red line, (autos, furniture, etc.), generally financed over a period of years. The black line is the sum of the installment plus revolving. It is interesting to note that the decline in borrowing that occurred after the great recession is now barely a blip on what would otherwise be a straight-line upward slope..
Figure 2 compares student loans to motor vehicle loans from 2006 to present. In 2006 auto loans accounted were 61% and student loans were 39%. Fast forward to 2016 and we see a substantial shift with 44% auto loans and 56% student loans. The health of the economy has a profound impact on both types of loans. In recessionary time’s auto loans fall into negative year on year growth as folks keep the old car going to conserve cash-flow. Student loans on the other-hand surge in volume as students stay in school for a second or advance degree as jobs are scarcer. In the period between 2008 and 2011 student loans averaged 13.2% year on year growth. Over the same time-frame auto loans recorded year on year declines averaging -1.6%.
At Gerdau, we monitor consumer spending because history has shown that increased consumer spending (approximately 70% of GDP), translates into increased steel consumption (and vice versa).